Commentary on Lara Buchak’s risk and rationality
Lara Buchak has written a splendid book that everyone interested in decision making should read. The mastery of technical material is impressive, and Buchak defends her views with ingenuity and insight. While I agree with her that the standard theory of risk is inadequate, I am not convinced by her alternative “risk weighted utility” (REU) because I do not find its “rank dependent” nature normatively appealing. After a sketch of REU, I will question certain aspects of its intuitive motivation, and raise some concerns about Buchak’s attempts to avoid “Dutch books.”
In Buchak’s picture a rational agent is represented by a triple 〈u, p, r〉 where u is a utility function that measures the agent’s desires of outcomes, p is a subjective probability function that reflects her beliefs about the probabilities of these outcomes, and r is an increasing risk functionthat maps probabilities into real numbers. The first two elements are familiar from expected utility theory (EU), where the...
KeywordsMarginal Utility Expect Utility Risk Function Risky Asset Selling Price
- Buchak, L. (2014). Risk and rationality. Oxford: Oxford University Press.Google Scholar